PREDICTING INDUSTRIAL COMPANIES FINANCIAL FAILURE USING SHERROD AND ZMIJEWSKI MODELS – ANALYTICAL STUDY

Abstract

Financial failure and bankruptcy are the most important financial risks that threaten an institution, they are considered the most significant issues, in terms of the possible effects on the wealth of creditors, stockholders, and society. Thus, many academics began to chase for a strategy to identify and forecast failure to retain the aim of company survival and continuity before the catastrophe occurs. The study aims at empirically testing the effectiveness of financial failure prediction models, namely: the B-Sherrod model and the Zmijewski model on forecasting the failure of public shareholding companies and the predictability power of both models for the period 2015–2019, based on the published financial data. The model’s application results indicated that: based on the Zmijewski model, companies listed in the first and second market, their financial position was sound (the possibility of bankruptcy is weak), while in the third market (OTC), some of the sample companies were in an improper financial position and were facing financial distress, which might lead to bankruptcy. These outcomes were in consensus when the B-Sherrod model was applied. Regarding the predictability power, results imply that both models have the same predictability power. Based on the above results, the study recommends the need for companies’ management to use financial failure prediction models to adopt precautionary measures to avoid any financial distress that may lead to bankruptcy, and the need to use financial ratio analysis to evaluate the company’s financial position.